Should Sturgeon and Swinney accent a flawed deal or spring the fiscal trap?

The fiscal framework is actually more important than the powers in the Bill as the new powers are severely limited and inflexible and don’t constitute a full enough range of economic and social levers to deliver real growth and equality for Scotland. The fiscal arrangement stalemate was easy to foresee. Back in November 2014 I wrote: “We are promised the best of both worlds but the Smith Commission is an unworkable constitutional fudge and the worst of both worlds”. I also predicted that “Westminster are going to try to sabotage the devolution of extra powers” and “shoot down any new powers that don’t come with huge caveats”.

The caveat attached is the funding formula that could have ended up costing Scotland £7bn over a decade. Now, with some Westminster concessions on offer, it could cost Scotland’s finances £3bn. Westminster is trying to cut Scotland budget by stealth and added to its pathetic £125m support for Aberdeen and its cancellation of grants for Scottish renewable energy generation sector in favour of English nuclear deals you could ask if there is a clear agenda to damage Scotland’s fiscal position ongoing. At its AGM in January, Business for Scotland passed a resolution calling for the rejection of the Scotland Bill with the fiscal agreement as it stands. We thought we were being contentious but it seems many others in Scotland had the same idea.

The key to understanding the fiscal framework conundrum is to understand how Scotland is funded and how that will change when some tax raising powers are devolved. Currently the Chancellor sets out his budget, a calculation then determines how much his policies would cost to implement in England. Then a population percentage share of that budget is paid to the other nations in the form of a block grant, with a top-up amount based on the Barnett Formula. The rationale for the Barnett Formula has changed over time but it has been kept as many policies cost more to implement in nations with more rural populations, different demographics and geographies.

So when the Scottish Government starts to collect income tax, Scotland’s block grant should be cut by the amount of income tax it will collect directly. In principle then a cut in income tax in Scotland would mean the cut is paid for in Scotland. Likewise if income tax rates are raised in Scotland then the additional tax revenues would stay in Scotland and that’s fair enough.

In year one its pretty simple, however Barnett never anticipated differing tax rates in Scotland, Northern Ireland and Wales so it starts to get complicated in later years to make sure that Scottish block grant adjustments are fair. A methodology to agree the size of adjustments every year given the different spending priorities of the Westminster and Scottish Governments needs to be agreed – and this is called indexation. Several indexing methodologies have been suggested but none of them really work. This is because the elephant in the room – the devolution of tax varying powers – cannot work without a full redesign of the UK constitution along federal lines and full fiscal autonomy for all the nations, possibly even English regions if they want it.

Federalism is not on offer so we are back to that unworkable constitutional fudge, one that amounts to a fiscal spending trap that could rip billions out of Scotland’s budget leaving us worse off than the rest of the UK.

Critics complain that the idea to reduce the block grant each year based on Scotland’s population share of the change in comparable tax receipts in the rUK will disadvantage Scotland. This is due to the fact that London and the south east has a larger concentration of higher-earning individuals and that population growth forecasts and differing economic and wages growth could mean Scotland is penalised, despite not having all the powers to fully impact on those variables. This is not a problem with full fiscal autonomy as we would then have the powers to create additional economic growth and raise our own budgets. But with a handful of unusable powers, future adjustments with a flawed fiscal agreement presents an unacceptable risk.

The Scotland Bill has fallen well short of the devolution aspirations of the Scottish people, which would involve the powers to vary VAT, control over employment law, minimum wages, corporation tax, capital gains taxes, full control over welfare, universal credit, pensions and inheritance tax. So the Bill offers a lot of risk for very little potential gain.

The STUC has seen through the fiscal trap, saying: “The STUC strongly suspects that the UK Government is using these negotiations to try to apply a financial cut to Scotland’s budget.”

Grahame Smith, STUC general secretary, said: “It would be wrong, ranking on the stupid, to propose acceptance of a fiscal framework” as it stands. This was a useful intervention as it seems to have forced Labour to admit the fiscal deal is not worth backing. Now only the Conservatives in Scotland are not backing the fairer per capita tax receipts system that will be adjusted to account for population ratios between Scotland and England.

Westminster’s position is so blatantly wrong that even the House of Commons’ Scottish Affairs Committee, most of whom represent English constituencies, unanimously backed the Scottish Government’s alternative formula. Surely the deal is dead now unless the UK Government radically changes its position on the fiscal formula before the new February 23 deadline?

The Tories and in fact all the Unionist parties thought they were on to a good thing – selling Scotland short on the promised more powers vow, adding a fiscal trap and then fighting the Scottish election with all the Unionist opposition parties challenging the SNP to say how they would use the unusable powers. If the SNP saw that coming and blocked the Bill then the Unionists’ would say the SNP is the party stopping devolution. However, the plan has backfired. Many who are no friends of the SNP have recognised the damage a poor fiscal arrangement will do to Scotland and are calling for it to be rejected.

This offers the SNP the covering fire they need to move against the bill unless Westminster agrees to a fairer indexing system.

The SNP Holyrood manifesto should seek a mandate for a new stronger Scotland Bill – one that meets the devolutionary needs and aspirations of the Scottish people – pointing out that failure to deliver it would create another potential trigger for a second independence referendum within the term of the next parliament. Then, instead of the SNP campaign being a prisoner to a flawed and unworkable bill complete with massive budget cuts, it will go into the Scottish election as the champion of real devolution.

If the SNP form a new Scottish Government with a majority mandate demand Westminster deliver the devolution max / near federalism we were promised by the No Campaign in 2014 and Westminster refuses, then everyone in Scotland who believed the unionist promises of meaningful devolution will see that they were lied to.

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Gordon MacIntyre-Kemp is the Founder and Chief Executive of Business for Scotland. Before joining Business for Scotland full time first as its MD and then CEO he ran a small social media and sales & marketing consultancy.
With a degree in business, marketing and economics, Gordon has worked as an economic development planning professional, and in marketing roles specialising in pricing modelling and promotional evaluation for global companies (including P&G).
Gordon benefits (not suffers) from dyslexia, and is a proponent of the emerging New Economics School. Gordon contributes articles to Business for Scotland, The National and The Huffington Post.

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Comments (3)

So, you want Scotland’s budget to be calculated on the population of England rather than anything Scotland achieves ? That’s right, That’s Freedom Yeah ?? Freedom!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

No – because our nation voted NO and we have to respect that we want the full devolution to the max / near federalism and Home rule we were promised we would get during the referendum. BfS has asked for full fiscal autonomy with a financial framework that respects the huge contributions that Scottish finances have made to the UK in the past then we will manage ourselves ongoing.

Failing that we as a nation will probably move to independence.

If Westminster insists on giving us useless powers that can’t be used because then Westminster would cut our block grant by billions then No we don’t want that. The Scotland bill isn’t freedom!!!!!…. its a way to trick Scotland out of what chance of wealth and prosperity we currently have by a distant, disinterested and dysfunctional Westminster parliament. You really need to take off your British Nationalist blinkers and give some independent thought to the issue you can be a No voter and not support moves to destroy Scotland’s economy – the two are not mutually exclusive.

NO, Scotland wants the UK to deliver what it promised to secure a No vote. Devolution is not the SNP’s policy, it is Westminster’s. The Smith Agreement and the Scotland Bill are Westminster’s babies. It’s too late for unionists to start bleating if they don’t like the mess they’ve created.